34 Tips on Small Business Tax Deductions and What to Claim

Taxes and small businesses

One way to illustrate the significance of the small company sector is to consider the fact that the government provides tax breaks to the small business sector for a variety of different reasons.

For small businesses just starting, the government recently introduced additional tax relief, which may help to reduce the tax burden in those difficult early days.

If a company's annual revenue is less than $10 million, it may be eligible for certain tax breaks known as small business tax concessions. These concessions include a number of different possibilities.

The new relief is applicable to all businesses that have an annual aggregated turnover of less than $10 million (which will be the majority of businesses in the start-up phase), and it enables an immediate deduction for a variety of professional costs incurred in the process of starting a business venture. These costs include fees for accounting and legal advice, in addition to a variety of government charges and taxes.

Individuals who want to establish a small business through another entity, such as a company or trust, are also eligible to make a claim for the relief offered by the government. That is to say, the individual who files the paperwork to claim the deduction for start-up expenses does not necessarily have to be the same person or entity that ultimately manages the business (the company or trust).

WHAT IS CLAIMABLE?

A new business can immediately deduct costs incurred in getting advice from a lawyer or accountant on how to structure the business. This includes advise on whether the firm should be established as a company, trust, or partnership; how the business should be financed; the costs of market research; and a variety of other topics. It also covers the costs that were incurred in actually setting up the business in accordance with its legal structure.

In addition, charges such as professional advice on the sustainability of the proposed business (including due diligence in the case of the purchase of an existing business) and the creation of a business plan could be considered eligible for reimbursement. In addition, the expenditures that are incurred in the process of raising debt and equity capital for the purpose of operating the proposed firm would be reimbursed.

It is important to keep in mind that you can submit a claim for the deduction even if the business does not move forwards. For instance, you might design a business plan, which finally reveals that the company would not generate a profit, and as a result, you might decide against moving through with the venture.

Additionally, it is now feasible to claim an instant deduction for a variety of payments to government agencies related to the regulatory expenditures that were paid in the process of establishing the new firm. This covers fees such as the charge for founding a business as well as expenditures related with transferring assets to that entity, such as stamp duty. This also includes any other fees that may be applicable.

On the list, some of the more obvious gems that deserve your consideration are as follows:

• Advertising and sponsorship costs
• Bank fees
• Tender costs (even if the tender is unsuccessful)
• Travel expenses for relocating employees
• Interest on some borrowings
• Home office expenses such as a portion of your rent or mortgage (See the ATO website) for more information
• Insurance premiums including car, building or cover for professional or public liability
• Key office expenses such as electricity bills, phone bills, rates, water bills, rent or lease payments for business premises, repairs or maintenance to the property
• Business memberships and magazine subscriptions
• Education, technical or professional qualifications expenses
• Tax expenses such as preparing and lodging tax returns and BAS

Also, the not so obvious:

Purchase assets today to gain

In the meantime, there are a few weeks left in which you can take advantage of many other potentially lucrative tax breaks that your small business may have neglected. Do you require fresh resources? It would be wise to make the buy at this time. A tax deduction for the purchase of assets in the amount of $20,000 has been made available to sole traders and small businesses as part of the federal budget for 2017. This deduction is available to any organisation that possesses a valid ABN and has annual revenue of less than $10 million. The objects you buy can be brand new or used, but they still need to have some kind of connection to your company. This new deduction has been made available until the end of June 2018, since it has been extended.

Also, under this perk, if you want to purchase a phone or a laptop for your small business but will also be using it for personal use, you can claim a deduction on the portion that is used for business use.

Pay off bad debt

Review your bad debts before the end of the fiscal year in order to lower the amount you owe in taxes. If it is highly improbable that the debt will be recovered, you should write it off at this time. This would prohibit the debt from being considered taxable income, which would in turn prevent the owner of the company from being required to pay taxes on the amount.

Before the 30th of June, there are a few other things that small firms should do, such as verifying their current debtor ledger, identifying debts in which the other party is bankrupt or has entered into liquidation, and marking debts that are older than six months.

Stock evaluation

It’s also the time for small businesses to review their stock and inventory. Find any stock that is broken or no longer needed, and either write it down or write it off. The value of the trading stock as well as your profit margins will be impacted as a result of this exercise.

Assemble those documents

An simpler step for owners to take is to total up all of the work-related expenses that may not be immediately apparent, such as donations, including political donations, car maintenance, business travel, stationery, and other office supplies. Examples of such expenses include:

A cursory investigation of your small business will undoubtedly reveal dozens of potential tax deductions; nevertheless, curiously enough, some of the most valuable deductions are often overlooked. Therefore, make sure you spend the time necessary to investigate each potential deduction for this year. After all, it is money that should be returned to your possession where it belongs.

Interest accrued can be deducted from taxable income

In most cases, the following criteria will have an impact on whether or not interest deductions are available to you:

• The activities of the taxpayer that generate income must be sufficiently connected to the taxpayer's interest in order for it to be deductible.
• If a new loan is utilised to repay a previous loan, the interest paid on the new loan may be deducted from the new loan's total cost. During the time of the second loan, was put to work either independently to generate taxable income or as an integral part of a firm that generated taxable income.
• If the borrowings are no longer used in the borrower's business or for any activity that results in income, or if the borrowings are put towards the production of exempt income, then the interest on the borrowings will no longer be tax deductible.
• Even if the borrower's business has shut down, the interest paid on loans may still be tax deductible. This rule can apply to other activities that produce taxable income, but it does not apply to the generation of exempt income.
• When interest costs are incurred prior to the beginning of a business or the generation of assessable revenue, they may qualify as a tax deduction.
• The purpose for which the money was borrowed is almost often the primary factor in determining the type of interest that will be charged.
• The so-called "rule of 78" can be applied to the computation of the interest component of the monthly payments made in accordance with a fixed-term loan or an extended credit transaction, but only under certain conditions. A loan's prepayment penalty interest might be tax deductible, depending on the circumstances.
• When a firm borrows money to pay off a tax debt, the interest paid on that loan is deductible as a business expense.

Companies

Companies could be able to deduct the interest expenses they pay if the money was used to:

• if it served as working capital in the company's operations and was utilised to generate assessable revenue, to repay share capital to shareholders; or
• finances the distribution of a declared dividend to shareholders when the money for that payout is utilised as working capital for the operation of the firm and is used to generate taxable revenue.

If the borrowed money is applied to any of the following:

• the amount of share capital that reflects bonus shares paid from an unrealised asset revaluation reserve or other equity accounts (such as internally created goodwill) must be returned to shareholders, or
• Dividends should be paid from unrealised profit reserves.

Borrowing Expenses

If you have to pay fees in order to get a loan, the fees are tax deductible to the degree that the money from the loan is utilised to generate taxable revenue. Expenses such as the following are eligible for reimbursement under this heading:

• costs of legal representation linked with mortgage paperwork
• appraisal costs that were incurred
• fees for the acquisition of the property and mortgage insurance (if any)
• mortgage paperwork are subject to stamp duty, and
• any additional fees for taking out the loan.

If the aggregate amount of these charges is less than one hundred dollars, then itemised deductions can be submitted in the same tax year that the expenses were incurred. In the event that the amount is more, the claim will have to be proportionately distributed over the shorter of the loan term or five years, with the clock starting to run from the day the loan was originated.

If you incur borrowing costs on multiple dates for separate facilities, you cannot simply add them to the opening balance of your still-to-be-deducted borrowing costs for that year. This is because the opening balance represents the total amount of borrowing costs that have not yet been deducted. It is essential to carry out a distinct computation in order to account for these extra borrowing costs.

Go through your subscriptions

At the close of the fiscal year, also known as the end of the financial year (EOFY), it is a good idea to examine whether or not your company is paying for software and services that it does not employ.

Checking the date and time that you were last signed in is one of the quickest and easiest methods to get started with subscriptions. You may find that you have a large number of smaller memberships than you anticipated. Even Spotify charges a monthly fee of ten dollars. In addition, if you utilise Hootsuite to manage your social media platforms, but you really post to all of your social channels directly, then there is no reason for you to pay for Hootsuite.

You might wish to take into consideration paying your premiums in advance depending on the financial flow of your company.

Instead of paying the premium on a monthly basis, you can consider making an annual payment in advance if you have the financial means to do so. There are situations when this will cause an increase in the cost of a premium by perhaps one hundred or two hundred dollars every year. Even if it isn't specifically labelled as such, this is still a form of interest charge; hence, it is built in.

Never consider your accountant to be the "taxman."

He acknowledges that many business owners view the cost of compliance as a "necessary evil," despite the fact that he believes there is value in what they give.

Many business owners view their accountants as the taxman when, in fact, they are there to help you. They are there to save you money, get back deductions, get you refunds and make deductions possible.

It is possible that as the owner of a business, you are unaware of the fact that when you operate a business, the lines are not as direct when it comes to individuals. If you're an individual, you claim a deduction against your employment income. There has to be a direct connection between the way in which that expense helps you create income from your employment, the way in which you was paid, and the amount of money that you were paid. When you're running a company, you have to cast your nett a little bit wider.

It is recommended that owners of small businesses think about the possibility of outsourcing accounting work "like anything else." Doing so will help them appreciate the importance of accountants.

Outsourcing an essential function of your firm, such as having someone else prepare your tax return, is an example of this. In general, when you outsource a task to another party, you anticipate that they will perform the task more effectively than you would. I am going to have to call a plumber since I have no idea how to replace a washer and I also have no idea how to fit out a bathroom.

Not all deadlines are inflexible

When it comes to taxes, certain due dates are firm (the due date of your small business tax return, for example). On the other hand, some of them aren't set in stone. Do not feel as though you have missed the opportunity if your company wanted to switch to a digital accounting platform for the upcoming fiscal year but hadn't done so by the first of July in 2017. There is still time.

Because it is digital and because you can upload bank statements from the previous three to twelve months, it is not necessary that it be the first of July.

As long as you have the system configured and the bank feeds connected, you are free to begin whenever you like. If you make your company activity statements on a quarterly basis, the first of any quarter is also a wonderful time that you can get starting. The first of July is quite a great point to land on, but the first of any quarter is also a fantastic time that you can get started.

There is always going to be a learning curve associated with this, but there is always going to be time for you to get up to speed.

You can't outsource everything to your accountant

While we’re all for small businesses using an accountant at tax time, there is still some onus on the small business owners themselves when it comes to tax.

While it is reasonable to expect the accountant to have a solid grasp of the situation, it is important for the owner of the company to maintain a sense of continued curiosity over the situation and to enquire about their account. "If I spend this, are I allowed to claim this?" Could I stake a claim on that?' In addition to this, as the conversation continues, the next step is to determine whether or not it will be included in the tax return.

The experiences of both the business owner and the accountant also factor into the equation regarding the appropriate level of balance. However, a business owner has insights from his field that he can bring to the table that an accountant does not have because the accountant works in a range of industries and can thus provide tax and business insights from there.

We will also add that from a legal perspective, "small business owners are always required to verify deductions in their text return.

Accountants aren't just there for tax

Small businesses that are going to or do use an accountant: when you connect with your accountant, use that as an opportunity to ask them to look over your business position. Accountants are not just there for tax.

It is a smart idea to consult your accountant at this time or at other times during the course of the year to gain insights into the ways in which you could improve the margins of your sales or increase your sales overall.

Use the skills your accountant has because they run a small business, as well. We understand the pressures that small businesses have because we suffer the same fate of what's going on in the economy.

Make the most of tax time by having a conversation with your accountant about your company in general and discovering more methods that they may assist you in being more profitable in the coming year.

 

 

INSTANT ASSET WRITE-OFF

One of the best tax breaks for small business remains the instant asset write-off, which is a great way for your business to acquire some much-needed capital assets to build your business and, at the same time, reduce your taxable profits.

The government has continued to play small and medium-sized businesses for fools by prolonging the popular $20,000 quick asset write-off programme for only one year at a time, despite the fact that there have been persistent calls for the government to make the much-loved programme a permanent fixture.

Regardless, it will continue to be in effect until the 30th of June this year, during which time owners of small businesses can still claim a maximum of $20,000 worth of assets for their companies. You have the ability to immediately claim a deduction for the business portion of an asset that you have recently purchased (such as a new coffee machine or circular saw), and that deduction can be up to $20,000 in total.

To make matters even better, the tax credit was just just expanded to include more money. Assets with a cost of up to $30,000 can now be immediately written off (previously, the limit was $20,000 up to the 29th of January 2019, after which it was briefly increased to $25,000 for items acquired between the 29th of January 2019 and the 2nd of April 2019; the new limit of $30,000 applies to any qualifying asset purchase made after the 2nd of April 2019). Additionally, the turnover requirement for enterprises that are eligible to file a claim has increased from $10 million to $50 million as of April 2, 2019. Previously, the turnover threshold was only available to companies that had an aggregated turnover of less than $10 million.

Amongst the items, you could look at claiming are the following:

• Cash registers and other POS devices
• Cars, vans and utes
• Fittings and fixtures for your premises
• Plant and machinery for your trade
• Computers, laptops and tablets
• Security systems
• Accounting software

The following are some important considerations to keep in mind if you want to reduce the likelihood that the ATO may contest the deduction:

Only small businesses qualify.

To be considered a small business, you must be actively engaged in commercial activity; it is not enough to merely possess an Australian Business Number (ABN).

Get a good understanding of the tax break. It is not a handout in the form of cash, but rather a deduction from the amount of your taxable profit. You will obtain a deduction of 27.5 percent of the amount you spent on a capital purchase, which is equivalent to a $8,250 reduction in your tax liability; but, you will still be out of pocket by more than $20,000 on the purchase because of this deduction. If it's something you were going to buy anyway, then congratulations and enjoy the advantage; but, if you've acquired something or are planning to acquire something only for the purpose of reducing your tax liability, you might want to reconsider your decision. Your gain from the year you made the purchase will be gradually eaten away by the government in the form of decreased deductions in subsequent years.

The amount that you are eligible to claim is not inclusive of GST. This is crucial information for your company if it is registered for the Goods and Services Tax (GST) and is eligible to claim an input tax credit on the transaction. The amount that you are allowed to claim is the price excluding GST.

It is necessary that the asset have been set up and be in a usable state. This is especially crucial to keep in mind if you made the investment in the asset in the final few weeks of the fiscal year. If you made the purchase before the 30th of June but didn't have access to it until July, you could only deduct the cost from the following year's profits instead of this one.

Used or pre-owned assets. You are eligible to make a deduction for assets that are used.

Beware private usage. To be eligible for the entire deduction, the asset in question must be put to use in the running of the business; however, if it has also been put to personal use, the deduction will need to be adjusted so as to take this into account.

MARKET STOCK

The Tax Act has a set of simplified trading stock regulations, according to which you are permitted to include the same stock value at year's end as you did at the beginning of the tax year if the value of your trading stock did not change throughout the course of the tax year by more than $5,000. If you needed to undertake a stocktake, you would have done it by now, but this is something that you should be aware of for the coming year in case it becomes necessary.

PRE-PAID CHARGES

In addition, a small business that pays certain business expenses in advance and makes the payment before the end of the fiscal year is eligible for an instant tax deduction for those expenses. You are eligible to make a claim for a deduction for the previous fiscal year for any payment that covered an expense that would carry over into the next fiscal year. Examples of such expenses include insurance premiums, rent, and membership dues to a trade or professional group. Check all of your payments that were made between 1 July and 30 June to see if any of them qualify.

GST

As a result of the fact that qualifying businesses are only needed to account for GST once they have received payment for it, taking care of your GST duties can also be made less of a hassle for you. In addition to that, you have the option of paying your GST in instalments, and the Tax Office will figure out the total amount of those payments on your behalf. If a small business decides to use part of the things it purchases for private use, it has the option of claiming the full GST credits and then making a single adjustment at the end of the tax year to account for the percentage of private use.

In the case of pay-as-you-go tax instalments, which are available to small businesses, you have the option to pay a quarterly instalment that is computed based on your most recent tax return assessment. This concession is available to small businesses. You won't need to bother with the time-consuming and labor-intensive "long-form" calculations because the income that is reported there has already been modified to reflect the most recent growth in gross domestic product. This adjustment will save you time and effort. For additional information, take a look at our guide to the GST tax.

Postpone billing before June 30

If you’re a small business (less than $10 million turnovers) and a client pays you immediately and you will get the money before June 30th, put off billing until July 1st. In a similar vein, if you own a large company, think about delaying your billing until after July 1 in order to also postpone tax.

Accept the cloud

Once upon a time, you were required to store every paper receipt that you had in an overcrowded filing cabinet, tucked away inside an envelope. There is no longer a requirement for you to preserve paper receipts, and all of your deductions can be safely stored in the cloud. If you own a company, you should probably look into using a solution that is hosted on the cloud such as Xero, Quickbooks or MYOB.

Before June 30, incur or pay for deductions

This one might seem like a no-brainer, but every year I spoke to a surprising number of people who put off important purchases like upgrading their mobile phone, purchasing a new computer, or making a donation until after July 1 when it was too late. The best course of action is to compile a list of the things that you require and establish a strategy for purchasing them well in advance of the month of June's conclusion, when you are likely to be tempted to forget.

Pay Super

If you have employees, you should pay their superannuation before the 30th of June in order to earn a tax deduction for this year. You should also make sure that you pay super for yourself. A worryingly high number of business owners run the risk of not having sufficient retirement savings. My general rule of thumb for determining how much of your salary should go towards your retirement is as follows: The lowest possible sum that you could expect to receive if you were to go out and look for work.

Revisit your Structure

Is the structure of your company such that it offers the lowest possible tax burden? If you operate your firm as a sole proprietorship, you are required by law to pay tax on each and every one of its profits, although other business forms, such as partnerships, corporations, and trusts, are exempt from this obligation. There are also ramifications for asset protection that should be taken into consideration when changing structure. While insurance can cover you, trading through a corporation or trust can provide an additional layer of security.

Logbooks

Check to see that your log books have been brought up to date. In the case of motor vehicles, this indicates that the logbook must be no more than five years old. Because of recent changes to the FBT, it is no longer relevant to the percentage that your FBT is calculated on how many kilometres you travel in a vehicle that is owned by a company or trust. As a result of these changes, it is now recommended that you keep a logbook for all of your vehicles that are owned by those entities. When calculating a car fringe benefit using the statutory-formula technique, a flat rate of twenty percent is applied, and this rate is applied regardless of the number of kilometres that the vehicle travels annually.

Look into your crystal ball

You might want to look at the timing of your tax-deductible expenses if you know that next year you are going to have a drop in income because you are going to take gardening leave, maternity leave, or because you are going to have some major expenses. For example, if you know that you are going to take gardening leave, maternity leave, or because you are going to have some major expenses. This is due to the fact that it may be beneficial for you to prepay expenses during this year when your income is higher. This can include expenses for travel, insurance, or interest on loans for up to a year's worth of time.

Tips for tax preparation that you may implement right away

If your cooperation with your advisor has not been fruitful in the past, you may want to take into consideration the following tax planning ideas for more fruitful results:

Set time priorities

Prepare yourself to devote some of your time to dealing with your tax obligations. Because it is such a crucial part of your company, you should pay close attention to it on a consistent basis.

Plan for a consulting fee

There will be a cost, and you need to make sure that this is accounted for in the expenditures that you have planned. You can be sure that it will be money well spent if you hire the proper advisor, since the advantages will significantly outweigh the price.

Plan a meeting to introduce yourself to your advisor

You will need to have a conversation with your advisor about your requirements, along with your financial plan. You should also come to an agreement on the scale and timeline of the task, as well as the scheduling related with it.

Always take the call when it comes in

Make certain that the agreements you make with your advisor allow for unrestricted communication to take place. Always pick up the phone, especially when it comes to dealing with significant transactions.

Have a thorough pre-financial year-end analysis

This will often involve the modelling of tax positions based on the current status quo, the examination of various improvement possibilities, and the implementation of agreed-upon steps, including the completion of any required documentation.

Meet with your advisor frequently

The scheduling of a meeting and devoting the necessary amount of time to it helps bring everyone's attention sharply in one direction.

We frequently find that, as a result of this emphasis, conversations flow more smoothly, and there is a greater level of information exchange between the persons involved. There is always room for improvement in strategies, which can lead to better results.

Always keep in mind that you don't know everything

The regulations regarding taxes are convoluted and comprise a great number of moving pieces, any one of which could be important to any business choice.

Your professional advisor is highly trained, with a team behind them experienced in customising business strategies. For the best results, use this expertise.

Understand what is on the ATO's watch list

The Australian Taxation Office (ATO) has made it a tradition to inform Australians about the aspects of tax season that it is monitoring, and 2018 is not an exception to this rule.

Earlier in the month of June, Assistant Commissioner Kath Anderson provided small businesses with information regarding what the Internal Revenue Service is actively monitoring. This time around, it takes into account work-related expenses such as using a car, doing laundry, and maintaining home offices.

Stacey Price, founder of Healthy Business Finances, cautions that in order to claim a deduction for work-related expenses such as furniture, heating and cooling, computers, and other equipment that are kept in a home office, the home office in question must be physically separated from the rest of the home. If you work from home, you may be eligible for this deduction.

A cryptocurrency is also on the ATO's hit list, which comes after a year in which numerous digital currencies on the market experienced unimaginable price appreciation. Investors in cryptocurrencies such as Bitcoin or Ethereum have been told by the tax office that the ATO possesses "advanced technologies that allow us to match data from banks, financial institutions, and online exchanges."

The tax office is also paying attention to laundry claims, and it is advising business owners to steer clear of making "unreasonable" clothing claims.

A significant number of taxpayers do, in fact, have valid claims because they wear uniforms, occupation-specific gear, or protective equipment. On the other hand, an excessively high number of people are demanding standard attire, such as a suit or black pants.

Your Business Tax Loss Claim May Be Rejected

There is a natural desire on the part of business owners to be able to claim a business loss as a tax deduction. However, it is important for business owners to avoid deviating too far from the generally accepted rules regarding tax losses, as there are situations in which the ATO has the legal authority to reject claims of this nature.

The Australian Taxation Office (ATO) possesses the discretion to deny a deduction for a tax loss if, during the relevant income year, the business that is attempting to make such a claim earned assessable income (or realised a capital gain) that would not have been derived had the loss been unavailable as a deduction. This occurs when the business would not have derived the income or gain if the loss had not been available as a deduction (our emphasis).

It is important for business owners to be aware of a measure that the Australian Taxation Office (ATO) refers to as a "integrity" safeguard that may result in the denial of a claim for losses and that is designed to ensure that such deductions are limited to those businesses that are legitimately eligible for them. These measures include the continuity of ownership and the same business tests. In addition, the tax law includes the measure that is discussed above.

The rules include a provision that "prevents" the Commissioner of Taxation from disallowing the deduction in the event that "continuing stockholders" stand to profit from the relevant income. This provision provides some sense of balance to the rules. However, the Commissioner is still afforded a considerable degree of leeway in terms of the manner in which they choose to apply the business loss criteria.

WHAT EXACTLY IS CONSIDERED A SMALL BUSINESS?

One definition of a small business is one that has a yearly revenue of less than $10 million, and this definition comes from the perspective of taxes.

The law says that turnover needs to be determined from the 'aggregated' numbers, which simply implies annual turnover (which is gross income, less GST) of any 'related' or 'associated' business. This is done to prevent enterprises from dividing activities so that they can sneak in below the $10 million level and receive access to the different tax incentives.

Creating and maintaining a successful small business is a labour of love, despite the fact that it can be difficult at times. Just as with anything else in life, it's necessary to give yourself some downtime and replenish your batteries. If you run a local company, you might be curious about whether or not it is possible to take a sabbatical without feeling anxious about the future of your company. Preparation is the most important step. Managing a small business may not offer you much room for spontaneity, but if you take the time to plan, you may find that you are able to focus more on the big picture and less on the details.

If you’re a small business owner and you haven’t taken a break in a while, read on to find out how you can shut off as your business ticks over.